|
 |
HRA Case Study
HRAs for different business types.
History of 105
How to use an HSA with an HRA.
S Corporation Information
Sole Proprietors
C Corporations
Partnerships
LLC
|
| What is 105 Concepts? |
| We like to look at ourselves as benefit plan facilitators. We don't put you in a box. We'll ask you the right questions than design a plan that fits your needs. Benefit plans should be as flexible as the employer that wants one. Every employer's benefit needs are different. We also extend our service to accountants and insurance agents. That means that you can work directly with your accountant or financial professional, someone you already trust. If you would like to have your accountant or financial professional offer our services to you, fill out this form, and we will contact them. |
| What is the cost of 105 Concepts? |
| There is a charge to set up an HRA. We will prepare the legal documentation for you. Plan fees vary depending on the type of plan you need. We also give discounts to members of certain associations or organizations. Give us a call at 866-752-6105 or email us at info@105concepts.com, tell us what organization you belong to, and we'll give you the correct price. |
| Can you explain what an HRA is? |
An HRA is a type of welfare benefit plan. A welfare benefit plan is a fancy phrase for, "you can't just reimburse medical expenses to your employees, you need a plan document." An HRA is an acronym for Health Reimbursement Arrangement.
You establish the plan guidelines, establish who qualifies, and how much of a benefit you will offer. There are numerous types of HRAs:
- Sole Proprietor HRA
- Dental HRA
- Vision HRA
- Group HRA
- Limited Purpose HRA
- Post Deductible HRA
- Suspended HRA
Look at it like a smorgus board of benefit plans. When you read publication 502 you learn about all different types of medical expenses that can be deductible through benefit plans. Here are some examples:
Your next step is to design a plan. You select the type of expenses you will offer and the plan guidelines. That is where we, (or your accountant/financial professional), come into the picture. We help you design the plan that fits your needs. The opportunities in plan design are really limitless, so talking to someone that will listen to you is important. Give us a call at 1-866-752-6105.
|
| Pick your business type. |
| Sole Proprietor, Schedule C, Schedule F |
A sole proprietor may not set up an HRA for himself because
the sole proprietor is the employer, not the employee. The
internal revenue code states that a self-employed individual
may not establish an HRA. The advantage comes into play
when the sole proprietor is married and can employ his spouse
as a legitimate employee of the business. The employer/owner
can then set up an HRA for his employee/spouse. The
employee/spouse can be reimbursed for all medical expenses
for herself, her spouse, and her dependents. This allows the
medical expenses to be deducted by the business (on Schedule
C or F) as an employee benefit plan thus saving federal and
state income taxes as well as employment taxes (social security,
medicare, FUTA and, possibly, SUTA). The benefit is not
included on the employee/spouse’s W2 as it is exempt from
these taxes for the employee’s purposes also.
In effect, amounts paid for medical expenses that were
previously subjected to employment taxes and limited to
deductibility only in excess of 7.5% AGI, are now fully
deductible for both employment tax and income tax purposes.
The tax savings can be considerable.
Q: Sole proprietors are eligible to deduct health insurance
premiums as “above the line” deductions so how does the HRA
help them?
A: By running the expenses through an HRA, employment
taxes are saved as well so there is an immediate tax savings of
15.3% just on the premiums. Out of pocket medical expenses
including the deductibles, co-pays, prescriptions, etc. can be
reimbursed through the HRA without any AGI limitations.
These costs alone can create significant tax savings (the 15.3%
payroll taxes plus federal and state income taxes).
|
| Partnerships |
A partner is deemed to be self-employed thus cannot participate
in an HRA. Employees of the partnership, who are not
partners, may participate. The partnership can hire the
partner’s spouse as an employee of the partnership and set up
an HRA for her benefit. As in the case with a sole proprietor,
the employee/spouse can be reimbursed for her, her spouse’s,
and her dependents’ medical expenses.
By establishing this employee benefit plan, the partnership can
deduct the reimbursed amounts from partnership income. The
amounts are also omitted from the employee’s W2. The
partnership realizes employment tax savings while the
employee saves both payroll and income taxes.
|
| C Corporations |
Corporations can establish HRA’s for the benefit of their
employees. The corporation, as the employer, can deduct the
reimbursed amounts as a fringe benefit plan thus reducing its
taxable income. The corporation will also realize payroll tax
savings on the amounts paid since there is no reporting of these
fringe benefit plan amounts on the employees’ W2 forms. The
employees receive both income tax and payroll tax savings. |
| S Corporations |
S Corporations can establish HRA’s for the benefit of their
employees just as regular corporations can. Employees, who
are not shareholders in the S Corp, are treated just as employees
of regular corporations – the fringe benefits are deductible by
the S Corp and are not included on the employees’ W2 forms.
The tax savings are the same as those for regular corporations.
The treatment is different for any employee who owns more
than 2% of the stock in the S Corp.
In this case, the reimbursement amount, because it is a fringe benefit, must be added back to the employee’s wages. It is added back to Box 1 wages (wages subject to income taxes) but not boxes 3 or 5 wages (wages subject to social security and medicare taxes). Health insurance premiums (and long-term care insurance premiums) can then be deducted on the face of the 1040 as an above-the-line deduction. There are limitations on the amount of long-term care insurance premiums that may be deducted in this manner. |
| |
Out of pocket medical expenses can also be reimbursed through an HRA of a greater than 2% shareholder but there is no tax advantage to do so. This is because the amount is deducted in the S Corp (Form 1120S), but it is added back into Box 1 wages (Form W2) of the shareholder. Unlike insurance premiums, the out of pocket expenses cannot be deducted on the face of the 1040 but must be deducted on Schedule A where it’s subject to the 7.5% of AGI limitation making it difficult, if not impossible, to deduct.
There is an advantage to increasing Box 1 wages for a greater than 2% shareholder. There is a credit for production activities of a business that qualifies and the credit is determined in part by wages paid, as reported in Box 1 of the employee’s W2 form. There are also retirement plans available where the amount contributed is limited to a percentage of Box 1 wages. By increasing Box 1 wages, you can possibly realize a greater tax
credit and contribute more to a retirement plan. |
| Limited Liability Companies |
LLC’s are a type of entity that can be treated in one of several
ways for tax purposes. In order to know whether or not, and to
what extent an HRA may be advantageous, you must first know
the tax treatment election that was made by the LLC.
The manner in which the LLC is treated for tax purposes
determines how the entity is treated for HRA purposes. An
LLC that is a sole member entity can be treated as a Schedule C
for income tax purposes. Just like a regular schedule C, this
entity would have to show spousal employment in order to
establish an HRA.
An LLC that is treated as a partnership for tax purposes can
establish an HRA for the benefit of employees who are not
partner/owners. They might also show spousal employment in
order to establish an HRA that would benefit the partners
through their spouses.
An LLC that is treated as an S Corporation can establish an
HRA for its employees. This also holds true for an LLC that is
treated as a corporation. |
|
| |
|
|
